NCPA - National Center for Policy Analysis


August 9, 2004

Economists John Cogan, Glenn Hubbard and Daniel Kessler have come up with a bold idea for reforming health care -- expand tax deductibility to include out-of-pocket expenses and individually purchased insurance.

The expansion of tax deductibility would have two effects, say the economists:

  • First would be the commonsense -- and perverse -- impact of increasing consumption and costs; expanding tax deductibility would lower overall health care prices to consumers and thus increase demand.
  • But the second effect goes the other way, reducing heath-care consumption and costs: Currently, by making employer plans cheaper than individually purchased ones, the tax exclusion creates a bias toward employer plans and away from direct purchase; so extending the tax exclusion to direct purchases of health care would level the playing field.

The economists estimate that the first effect will cause annual health care spending to rise by about $5 billion. Then add another $1 billion in the increased coverage coming from those who are currently uninsured, and the total increase comes to $6 billion. As for the second effect -- extension of the tax deduction will decrease costs because people shift to higher deductible, higher coinsurance policies -- the economists estimate that if the average deductible rises from $250 to $500, health-care spending would decline by $43 billion. If coinsurance rates also rise to 25 percent, health care spending would decline by $69 billion.

The bottom line is that the net reduction of spending on health care would be $63 billion a year, say the economists.

Source: Susan Lee, "A Tax-Code Cure for Ailing Health Care," Wall Street Journal, August 9, 2004.

For WSJ text (subscription required),,SB109200556254686007,00.html


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